3 Rules Ensure That You Can Deduct Lodging Expenses under Regs—Even When You’re Staying Close to Home!Tax Planning
Estimated tax tip savings: If you spent $3,700 on deductible lodging over the past year, depending on your tax bracket you could save up to 28 percent—or $1,036—which is a tidy discount on your hotel bills.
Until recently, the IRS would not allow you to deduct expenses for lodging unless you traveled away from your tax home.
Good news: The rule has now changed, and it opens up some great tax deduction opportunities.
In particular, this is a tax-savings boon for business owners who
- drive a lot for business and occasionally find lodging within their tax home (which is generally the city or locality in which you work most of the year);
- want to stay at a hotel the night before or during a business activity across town; or
- find a good business reason to have a “hotel staycation” in a fun area.
Follow These Rules
The best way to make your local lodging expenses deductible is to meet the “safe harbor” test in the regulations.
The safe harbor is a sure thing—if you meet the rules, you’re certain to get the deduction.
If you don’t quite meet all the safe harbor rules, you can still claim the deduction, but you face some uncertainty.
The IRS must first determine that the “facts and circumstances” of your case are close enough to the safe harbor rules that you still qualify for the deduction.
The next sections explain the three safe harbor rules.
Rule 1—Necessary Expense
You must use the lodging for the purpose of participating fully or being available for a bona fide business meeting, conference, training activity, or other business function.
The regulation gives examples of what will and will not satisfy this test:
Example. You hold a full-day training session for your employees at a hotel near your office. You can deduct the cost of your stay at the hotel, which you purchased in order to facilitate the training. If you require your employees to stay at the hotel and you pay for their stay, you can deduct their lodging expense as well. Your employees treat the stay as a tax-free working condition fringe benefit.
Rule 2—Less Than Five Days and Once Per Quarter
To qualify for the safe harbor, your stay cannot exceed five calendar days and should not recur more than once per calendar quarter.
It’s not clear from the rule whether the once-per-quarter rule applies to all local lodging or only lodging at the same hotel. The safe path for now is to use the local lodging rule only once per quarter, regardless of where you stay.
Example. You stay at a fancy hotel with your spouse on the opposite side of town to facilitate getting to a business negotiation with a potential customer who lives in that area. You expect the negotiation will last off-and-on for three days. You check in on Sunday night and check out on Thursday.
Your stay at the hotel lasts five calendar days. You can fully deduct the cost of your lodging as long as you do not use this rule again within the same quarter of the calendar year.
Rule 3—No Extravagant Lodging
Rule three says that your lodging cannot
- be lavish or extravagant under the circumstances or
- provide a significant element of personal pleasure, recreation, or benefit.
A hotel is not “lavish or extravagant” as long as it is reasonable given the circumstances of your work and the alternatives available. The tax court allows you to stay in “deluxe” hotels and resorts, even if there are cheaper alternatives in the area.
The “significant element of personal pleasure” rule comes into play if you stay in a hotel that has a spa or an unusual degree of recreational activities. When you stay at such a place, you want to justify this choice in your records. You might give one of the following reasons, for example:
- It is the only hotel in the area where you need to stay.
- It is more reasonably priced than nearby hotels.
- You can prove that your business schedule does not allow you to participate in the recreational activities.
Bottom line. The key to satisfying rule three of the safe harbor is having a solid business purpose for your stay. If you are staying at a hotel for a bona fide business reason, the courts are unlikely to consider your stay extravagant or too recreational.
Keep the Proof You Need
Tax law requires you to keep a receipt of your lodging expense that contains the following information:
- The amount of the stay
- The date of check-in and check-out
- The name of the city or town where you stayed
- The business purpose of the trip
Note. Your receipt will not state the business purpose of the trip. Write this yourself either on the receipt or on a separate document that you attach to the receipt.
The IRS now allows a business deduction for the cost of local lodging, and you should take advantage of it.
What if your line of business doesn’t require much travel? You can still benefit from this rule. Remember—you can create the business purpose. Consider all the possible reasons you might think up to justify staying in a nice hotel for business reasons, such as
- conferences, conventions, and seminars that you organize;
- board meetings; and
- employee training.
The best way to ensure your deduction is to meet the three rules of the safe harbor:
- The lodging allows you to fully participate in or be available for a business activity.
- Your stay does not exceed five calendar days and you do not use the deduction more than once per calendar year.
- The lodging is not lavish or extravagant and does not provide a significant element of personal pleasure, recreation, or benefit.
And don’t forget the most important rule—keep your receipt!